AdvisorShares Weekly Market Review – Week Ending 1/16/2015

Highlights of the Prior Week

Macro

Thursday was a truly monumental day in the capital markets as the Swiss National Bank (SNB) threw in the towel on trying to maintain its currency at 1.20 to the euro. The reason for the peg was to keep its exports competitive in the European market. The natural inertia has been franc strength against the euro due to Switzerland’s relative economic strength.

The immediate reaction to the news sent Swiss franc up 30% against the euro and 25% against the US dollar before closing the day with gains of 19% and 18% respectively. These would be large moves for multi-year periods let alone one day.

Bonds also reacted swiftly. The Swiss ten year bond yield cut more than in half to 0.08% on Thursday and fell further on Friday to 0.03% which is at least in part a deflationary story. The US Ten Year fell to 1.77% but lifted on Friday up to 1.81%. The German bund fell slightly to 0.47% on the news and closed the week yielding 0.45%, the French OAT fell to 0.67% settled at 0.63% Friday, ten years in Spain will now get you 1.50% and Italy yields now 1.66%.

West Texas Crude fell more than 4% on the news after briefly having traded above the price for Brent which for its part fell 3%. For the last few years WTI has traded at a discount to Brent after years of trading at a premium. We will continue to monitor this relationship as it has come back into play. Crude made it’s losses all back on Friday and closed the week up 2% for its first weekly gain this year.

Gold rallied slightly, 2%, on the SNB news and kept on rising Friday to finish the week with a 4.5% lift.

We usually round up the currency trading by comparing the dollar to the euro, British pound and yen but in a week such as this past one, those take a back seat in importance. Any currency relevant to the portfolio you manage took a big hit against the Swiss franc. Analysis on this story is widely drawing negative conclusions for Swiss equities as many are multinationals that will now take a hit to earnings as the strong franc will hurt their profitability as the goods they export will bring in less revenue.

For the week the domestic equity markets all finished lower. The Dow Jones Industrial Average fell 1.3%, the S&P 500 dropped 1.26%, the NASDAQ lost 1.5% while the Russell 2000 gave back 0.74%.

Foreign equity markets had more interesting trading last week, Europe especially. The Nikkei fell 3.39%, the Hang Seng rose 0.79%, Shanghai gained 2.77% and the ASX 200 gave up 3.39%. In Europe the FTSE 100 gained 0.76%, France rose 4.8%, the German Dax added 5.3% and the Swiss Market Index fell 13.25% for the entire week.

Despite the crash of Swiss equities in franc terms but in US dollar terms most equities and the ETF tracking Switzerland all rallied because of the overwhelming strength of the currency. The Swiss Market Index rallied 3% on Monday and the euro was traded higher against the franc on Monday. The SMI continued to rally on Tuesday but the euro/franc cross rate dipped slightly.

There have been a couple of noteworthy corporate casualties connected to the franc news. In a flashback to 2008 Raiffensen Bank International is one of several Austrian banks that issued loans in Swiss francs to customers making payments in euros. Imagine the principal on your mortgage going up 20% overnight and you being to understand the problem.

Shares in currency brokerage firm FXCM are poised to open 88% lower as of this writing early Tuesday after having been halted for trading on Friday. The story here is the high leverage that forex traders use and the a version of the cliche that when you owe the bank $1 million it is your problem but when you owe the bank $1 billion it is the bank’s problem.

ETF News & Data

The SPDR S&P 500 has continued to dominate the fund flows in an unusual way. During the last full week of 2014 it was the beneficiary of a massive $25 billion inflow. At the time we wondered about year-end window dressing. In the new year it has topped the outflow list by a wide margin losing several billion dollars a week including a $5.9 billion exodus last week. We will continue to monitor this and report on it here.

There were three new funds last week; two factor funds from iShares and a dividend oriented fund from QuantShares.

Interesting Reads

Here is a fun look at houses made out of shipping containers. While the innovation displayed here is interesting there is also a very practical financial element here. Downsizing no longer has to mean buying an ugly and used trailer for $3000 and being miserable. The innovation in things like tiny houses, shipping container houses and the like make for beautiful homes with high end finishes and this sort of upscale downsizing will be the solution for some clients which can make for an easier conversation when a client’s numbers don’t quite add up which happens in every advisory practice.

Sports

The 2015 Dakar Rally finished up over the weekend. The Quad Class was won by 48 year old Rafal “Super” Sonik from Poland who offered the following inspirational quote in his post race interview;

Weekly ETF Flows

For January 12, 2014 to January 16, 2015

S&P Sector Analysis

As for the sectors of the S&P 500, five outperformed the broad benchmark – Utilities, Energy, Telecom, Staples and Healthcare. The remaining five – Industrials, Materials , Technology, Discretionary and Financials – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 4.73% this week, with Utilities outperforming all, and Financials coming in last.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers. AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.